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Hidden cost warning for forex traders

Several hidden costs in forex trading could eat into traders’ profits, and it is important to be aware of them to make informed decisions.

This is according to Roger Eskinazi, managing partner at Tickmill, a forex trading platform.

“Forex trading comes with its fair share of profit opportunities, but it also comes with several costs,” Eskinazi said. 

“Understanding what these costs are – as well as some of the hidden costs involved, is an important factor in making informed decisions.”

He explained that all Forex brokers have different cost structures for spreads, commissions, account fees, and rollover fees.

Therefore, Eskinazi recommends that aspiring traders familiarise themselves with how their broker approaches these costs.

“Finding the right broker for your unique trading style and financial goals is a crucial step in ensuring that your trades are as profitable as possible both now and in the long term,” he said.

The costs associated with online trading are an important factor to account for because they will directly impact metrics such as net returns. 

This could, in turn, impact how quickly and efficiently a trader is able to realise their financial goals. 

For this reason, Eskinazi recommends that traders factor these costs into their trading plan and, where necessary, consult with their broker on how to manage them and keep them as low as possible.

“Where trading costs are concerned, transparency is key,” he said.

“By providing traders with cost breakdowns and information upfront, we can empower them to make informed decisions, avoid unnecessary outlays and improve customer satisfaction.”

Eskinazi outlined three costs that traders often overlook but should be aware of.

Understanding spreads

Forex traders usually keep a close eye on the spreads – a cost paid to the broker every time someone executes a trade. 

Eskinazi warned that even a small spread could add up over multiple trades and impact overall profitability.

Simply put, the spread is the difference between the buying (bid) and selling (ask) price of a currency pair. 

“It’s essentially the cost of entering a trade and is usually measured in pips,” he explained. 

A pip, or ‘percentage in point,’ is the smallest unit of price movement in forex trading and represents a fractional change in the exchange rate

For example, consider a scenario in which the currency pair is USD/ZAR, where the bid price is 18.50 ZAR, and the ask price is 18.55 ZAR. In this case, the spread would be 0.05 ZAR – or 500 pips.

If the trader wants to buy 10,000 USD worth of ZAR at the asking price of 18.55 ZAR, the total cost of their opening position would be 185,500 ZAR. 

If the trader later decides to sell the 10,000 USD at the running bid rate of 18.50 ZAR, the total received would be 185,000 ZAR. In this case, the spread cost would be 500 ZAR, which would be the broker’s fee for facilitating the trade.

Therefore, knowing the spread before initiating the trade can significantly affect the level of profit realised. 

“By understanding and accounting for the spread, traders can better manage their trading strategies and potential profits,” Eskinazi said. 

Broker commission

Another cost that traders need to be aware of is trading commission, which is a charge deducted when opening a trade. 

Depending on the platform, commission is typically charged either ‘per million’ or ‘per traded lot’.

Eskinazi explained that traders often overlook commission costs because they are not immediately deducted from their account balance.

“But these costs can add up quickly, so it’s definitely something to look into before forming a relationship with a broker,” he said. 

“It’s also important for traders to compare the spread cost with the commission cost because, in some cases, they may be inversely related. In other words, when spreads are very low, commission structures may be very high.”

Inactivity and withdrawal fees

Two lesser-known fees that are often not accounted for when traders review their costs are inactivity and withdrawal fees. 

Inactivity fees refer to a case where some brokers charge traders a fee if they do not initiate a trade for a specific time period. The size of this fee and the applicable period typically vary quite widely from broker to broker.

Withdrawal fees are charged when traders withdraw funds from their brokerage accounts. Most brokers charge a fee that is either fixed or commensurate with the amount being withdrawn. 

“In most cases, this is done to cover any relevant processing fees and to discourage frequent withdrawals,” Eskinazi explained.

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